Hong Kong will raise the tax on high earners, the first increase in two decades, in a surprise move designed to lower the city’s fiscal deficit.
A two-tier tax system will be introduced in April, with income of up to HK$5 million taxed at 15%, and anything higher than that being taxed at 16%. Previously, tax for all individuals was capped at 15%.
The move will affect about 12,000 people or about 0.6% of taxpayers, Financial Secretary Paul Chan said in his annual budget speech on Wednesday (Feb 28, 2024).
Hong Kong is looking at ways to plug the hole in its budget, with the deficit for the year ending March 31 projected at HK$101.6 billion, almost double the estimate laid out a year ago.
However, increasing the tax on the high earners may hinder finance workers at a time when the government is seeking to revive the industry and attract talent.
The move will bring in about HK$910 million of additional revenue each year, Chan said, adding that the new tax rate will still be lower than in other advanced economies.
“It’s a fair principle in many countries to let the high earner pay more instead of making a fundamental change to the entire tax system,” said William Chan, tax partner at Grant Thornton Hong Kong.
“The impact of this two-tier tax system on high-income earners should be small,” he added.
Hong Kong last raised the overall tax rate on salaries in 2003, when it was increased to 16%. The rate was cut back to 15% from 16% in 2008 after the city reported a record budget surplus. The city has no goods services tax or capital gains tax.
As the biggest landlord, the government has historically relied on land sales to bolster revenues.
However, a decline in demand for housing and office space led to the government halting the sale of residential land for the first time in 14 years, and commercial land.
The government has reached only 23% of its annual targeted sale revenue of HK$85 billion with just one month left in the financial year, according to Chan.
He removed all cooling measures on housing to boost the market in his Wednesday speech.
While the tax increase is a marginal one, it’s still a surprise, said John Mullaly, Hong Kong managing director of recruiting firm Robert Walters.
“The first reaction I have been getting from my network is that they didn’t expect this,” Mullaly said. “For now, it’s not a significant enough increase to make most people question whether they should be in Hong Kong.” – Bloomberg
